Typical contingencies in real estate include clauses for a home inspection, financing, clear title, appraisal, and often home sale (which we talked about previously).1 Some things you should think about are:
- Why do you need a home inspection
- What happens if you can’t get financing
- Ensuring there is a clear title is important
- Lenders require an appraisal before you can get a loan
- Home sale clauses can be complicated
These clauses are common for a reason. Each protects the buyer and often the seller from major problems that can arise during the home sale process.
What Does a Home Inspection Contingency Mean?
A home inspection contingency releases the buyer from closing on a house that has a structural problem. Most buyers know about this contingency, and these offer a general examination of the interior and exterior structure as well as the home’s systems. Some things that you should consider including are:
- Wood destroying insects
- Harmful gases such as radon
These are usually not included, but you can add them. This clause is very important for your peace of mind to know that you are buying a structurally sound house. You may negotiate over repairs, or if the house has too many costly issues you can walk away from the deal.
Negotiate After Inspection
You should negotiate after the inspection realistically. Most people assume that after the contracts are signed that everything else is a formality. Making sure about the condition of the house is important, though.
- Ask for a credit for any work that needs to be done
- Think about the renovations that you want to make
- Don’t let the other side know about your plans
That last point may seem odd, but in most cases, the listing agent will attend the home inspection. They will likely report anything you say about the property back to the sellers. Further, remember it is almost always better to ask for credit because the seller wants to leave and may not give the care to quality that you will like the new buyer. Besides, if you want to get a bathroom or kitchen then having credit is better than a wasted repair.2
Remove Inspection Contingency
When you remove an inspection contingency you give up the ability to negotiate repairs or back out of a contract on a house that may have structural problems.
- A licensed inspector often finds hidden problems that you should deal with
- If you remove it you give up the right to ask for repairs
- You also give up the right to cancel the contract
If you feel like you need to give up this contingency to make the deal happen, then try changing the contingency to at least keeping the provision to walk away if any found problems are significant.
A financing type of contingency protects the buyer if they can’t secure a mortgage or other financing in order to close on the property. It allows the buyer to cancel the contract if the buyer:
- Can’t secure a mortgage
- Has a financial crisis where they can’t secure proper financing
All buyers must secure financing, whether they pay cash or with a mortgage. While most buyers get preapproved for a mortgage or have money in the bank before they sign a contract, a financial crisis can happen.3
A title contingency releases the buyer from closing on a house where the seller can’t produce a clear title. Most of the time there is no problem, but if there is a problem it can cause huge issues. It will find any
- Ownership issues
These issues come up often. In fact, in many cases, the seller doesn’t even know about them. This contingency is so important that in some areas you can’t remove it from a contract. Even if you can remove it you never should.4
Appraisal contingencies are very common. Mortgage companies require an appraisal before they will give a loan because they will not finance more than the property is worth. If the house does not appraise for the selling price:
- Bank will not finance more than the appraised value
- Seller may reduce the price to the appraised value
- Buyer or seller can ask for another appraisal of the property
- Either party may cancel the contract
- Buyer and seller may negotiate a price where the seller accepts less and the buyer pays some out of pocket
This clause is usually not an issue for standard homes in neighborhoods where many houses sell. Agents will not want to list a house for a price that won’t appraise. Likewise, a seller does not want to have contracts fall through over this issue. This becomes a problem when the house is unique. If the appraiser can’t find good comparable properties, they may not be able to adequately appraise the home.5
A closing contingency protects either the buyer or seller (or both) because they need the funds from one deal to close another.
- Often, a buyer needs to use the proceeds from a house sale in order to close their purchase
- A seller usually wants to buy a new place to live before they finalize a contract on their existing property
In either case, these contingencies can get complicated because of timing.
Subject To Seller Finding Suitable Housing
A subject to seller finding suitable housing clause allows the seller to find a new home before they close on their existing house. The seller should:
- Make it clear that the sale is contingent
- Specify time periods for other contingencies, so the buyer won’t have to put out money before the seller clears up this issue
- Extend the closing date
While these clauses are common, they are not as complicated as a buyer’s closing contingency can be. Once the seller finds a new home, they usually remove this clause, and the closing proceeds smoothly.6
Buyer Home Sale Contingency
A buyer often puts a home sale contingency into their purchase contract for their new house. The most common reason they need the proceeds from the sale in order to close their new property. These clauses come int two varieties:
- Sale and settlement
A sale and settlement clause gives the buyer time to market and then close their property before they close the new contract. Often, these clauses give the seller the opportunity to accept another offer if the buyer can’t remove the contingency. If the buyer includes only a settlement clause it means that they already have a contract on the property they need to sell before signing the agreement to purchase their new home.7
What contingencies should be put in an offer?
All five of these types of contingencies should be put on offer if necessary. These are all common clauses contracts. Buyers should always include home inspection, financing, clear title, and appraisal clauses. These are standard clauses that protect buyers. Home sale contingencies are common, but they don’t apply to all contracts, only cases where one sale is dependent on another.